How to Calculate TDS on Salary: A Step-by-Step Guide

Knowing how to calculate TDS on salary is the core tax responsibility of every Indian employer. Unlike TDS on vendor payments, salary TDS is not a flat rate. The employer must estimate the employee's income for the whole tax year, compute the tax under the regime the employee has chosen, and spread it across the remaining months so that the full year's tax is deducted by March. Under the Income-tax Act, 2025, effective 1 April 2026, the obligation continues (formerly section 192), with new section numbers and the term "tax year". This guide gives the method, worked examples and the edge cases that cause shortfalls.

The Employer's TDS Obligation

• Deduct tax at the average rate on estimated salary income for the tax year.
• Deposit TDS by the 7th of the following month (30 April for March).
• File the quarterly TDS statement for salaries (formerly Form 24Q).
• Issue the salary TDS certificate (formerly Form 16) by 15 June.

Under-deduction makes the employer liable for the shortfall plus interest. Over-deduction is not penalised but frustrates employees, who must wait for a refund.

Step-by-Step Method

1. Determine the regime. Use the employee's declaration. If none, apply the new regime (default).
2. Project gross salary for the year. Actual salary paid so far plus projected salary for the remaining months, including known bonuses and arrears.
3. Add perquisites (taxable value of company car, concessional loans, ESOPs on exercise) and income from previous employers declared by the employee.
4. Subtract exemptions allowed in the chosen regime (HRA and LTA only in the old regime).
5. Subtract the standard deduction: ₹75,000 in the new regime, ₹50,000 in the old regime.
6. Subtract other deductions declared and allowed (old regime: 80C, 80D, home-loan interest, PT; new regime: mainly employer NPS).
7. Add other income the employee has declared to the employer, if your policy allows.
8. Compute tax on slabs, apply rebate or marginal relief, add 4% cess (and surcharge if applicable).
9. Subtract TDS already deducted this year (by you and by any previous employer).
10. Divide the balance by the number of remaining months, including the current one.

New Regime Slabs Used in the Examples

Taxable income	Rate
Up to ₹4 lakh	Nil
₹4 to 8 lakh	5%
₹8 to 12 lakh	10%
₹12 to 16 lakh	15%
₹16 to 20 lakh	20%
₹20 to 24 lakh	25%
Above ₹24 lakh	30%

Rebate makes tax nil for resident taxable income up to ₹12 lakh. These are the slabs from FY 2025-26; verify for the current tax year. Our old vs new regime comparison lists the old regime slabs.

Worked Example 1: Steady Salary, New Regime

Karan's gross salary is ₹1,50,000 a month (₹18,00,000 a year). He has no other income and is on the new regime.

1. Taxable income: ₹18,00,000 minus ₹75,000 = ₹17,25,000.
2. Tax: ₹20,000 (4 to 8 lakh) + ₹40,000 (8 to 12 lakh) + ₹60,000 (12 to 16 lakh) + 20% of ₹1,25,000 (₹25,000) = ₹1,45,000.
3. Cess at 4%: ₹5,800. Total tax: ₹1,50,800.
4. Monthly TDS from April: ₹1,50,800 ÷ 12 = ₹12,566.67, deducted as ₹12,567.

Employee PF is not deductible under the new regime, so it does not reduce taxable income.

Worked Example 2: Bonus Mid-Year

In October, Karan receives a one-time bonus of ₹1,00,000.

1. Revised taxable income: ₹17,25,000 + ₹1,00,000 = ₹18,25,000.
2. Tax: ₹1,45,000 + 20% of ₹1,00,000 = ₹1,65,000. Cess ₹6,600. Total ₹1,71,600.
3. TDS deducted April to September: 6 × ₹12,567 = ₹75,402.
4. Balance: ₹1,71,600 minus ₹75,402 = ₹96,198.
5. Remaining months October to March: 6. Monthly TDS: ₹96,198 ÷ 6 = ₹16,033.

Some employers deduct the entire extra tax on the bonus (₹20,800) in October instead of spreading it. Both approaches meet the obligation if the full year's tax is deducted by March; spreading keeps monthly take-home smoother.

Worked Example 3: Marginal Relief Near ₹12 Lakh

Divya's taxable income after standard deduction is projected at ₹12,10,000.

• Normal tax: ₹20,000 + ₹40,000 + 15% of ₹10,000 (₹1,500) = ₹61,500.
• Income above ₹12 lakh: ₹10,000.
• Marginal relief caps tax at the excess income: ₹10,000. Cess ₹400. Total ₹10,400.
• Monthly TDS: ₹10,400 ÷ 12 = ₹866.67, deducted as ₹867.

Without marginal relief, payroll would deduct ₹63,960 for the year, more than six times the correct figure.

Worked Example 4: Mid-Year Joiner

Sanjay joins on 1 October at ₹1,00,000 a month. His previous employer paid ₹6,00,000 for April to September and deducted ₹18,000 TDS. He submits these details on joining.

1. Total projected salary: ₹6,00,000 + 6 × ₹1,00,000 = ₹12,00,000.
2. Taxable (new regime): ₹12,00,000 minus ₹75,000 = ₹11,25,000. Tax after rebate: nil.
3. TDS already deducted: ₹18,000, which is excess.
4. Your TDS for October to March: nil. Sanjay claims the ₹18,000 as a refund in his return.

If Sanjay had not declared previous income, your system would compute tax on ₹6,00,000 only, still nil here, but at higher salaries ignoring previous employment leads to short deduction across both employers.

Worked Example 5: Old Regime with Declarations

Lata earns ₹15,00,000 and declares old regime with 80C ₹1,50,000, 80D ₹25,000, PT ₹2,500 and HRA exemption ₹1,20,000.

1. Taxable: ₹15,00,000 minus ₹50,000 minus ₹1,20,000 minus ₹2,500 minus ₹1,50,000 minus ₹25,000 = ₹11,52,500.
2. Tax: ₹12,500 + ₹1,00,000 + 30% of ₹1,52,500 (₹45,750) = ₹1,58,250. Cess ₹6,330. Total ₹1,64,580.
3. Monthly TDS: ₹1,64,580 ÷ 12 = ₹13,715.

If in January Lata's proofs support only ₹1,00,000 of 80C, taxable rises by ₹50,000, adding 30% plus cess, ₹15,600 for the year. That amount is recovered in January to March, increasing her TDS by ₹5,200 a month.

Perquisites, Other Income and Missing PAN

Perquisites

Salary for TDS includes taxable perquisites, valued under the rules. Common ones in Indian payroll:

• Company car used for personal purposes, valued at prescribed monthly amounts depending on engine size and who bears running costs.
• Interest-free or concessional loans above the exempt threshold, valued at the difference between a reference rate and the rate charged.
• ESOPs, taxed on exercise at fair market value minus exercise price.
• Rent-free accommodation provided by the employer.

Perquisites are taxable in both regimes. Add them to projected salary in the month they arise and recompute the remaining TDS, just as with a bonus.

Other income declared by the employee

Employees may ask you to consider other income (interest, rent) so that tax is collected through salary rather than as advance tax. The employer may also consider a loss under house property within the permitted limit (old regime). Collect a signed declaration and keep it on file.

No PAN

If an employee has not furnished a valid PAN, TDS on salary is deducted at the average rate or at 20%, whichever is higher, unless income is below the taxable limit. Chase PAN before the first payroll; this rule can take a large bite out of a new joiner's salary.

Arrears and relief

When arrears relating to earlier years are paid, the employee may claim relief by spreading the income back to those years (formerly section 89, with Form 10E). The employer can allow the relief in TDS if the employee submits the computation. Our salary arrears guide has a worked example.

Sample TDS Working on a Payslip

Line	Annual projection (₹)
Gross salary	18,00,000
Less: standard deduction	75,000
Taxable income	17,25,000
Tax on slabs	1,45,000
Cess	5,800
Total tax	1,50,800
TDS deducted to date	As applicable
TDS this month	12,567

Printing this projection on the payslip or in an annexure reduces queries.

Common TDS Mistakes

• Fixing TDS in April and never recomputing after increments, bonuses or proofs.
• Missing marginal relief just above ₹12 lakh.
• Allowing old-regime deductions for new-regime employees.
• Ignoring previous employer income for mid-year joiners.
• Not including perquisites like interest-free loans or ESOPs.
• Leaving a shortfall to March, causing a very low take-home in the last month.
• Deducting TDS without a valid PAN at normal rates; without PAN, a higher rate applies.

Monthly TDS Checklist

1. Confirm each employee's regime and PAN before the first payroll of the year.
2. Update projections for increments, bonuses, arrears, perquisites and joiners.
3. Apply rebate and marginal relief correctly near ₹12 lakh.
4. Replace declared deductions with verified figures once proofs are in.
5. Recompute remaining TDS every month, not just in April.
6. Deposit by the 7th and reconcile challans with the payroll register.
7. File the quarterly salary TDS statement and resolve any default notices quickly.

TDS in Fininvo Payroll

Fininvo Payroll handles TDS on salary, investment declarations and salary certificate generation, recomputing tax from processed salary each month. Explore India payroll and TDS reports.

Frequently Asked Questions

How is monthly TDS on salary calculated?

Estimate annual taxable salary, compute tax under the chosen regime with rebate, relief and cess, subtract TDS already deducted, and divide the balance by the remaining months.

Is TDS deducted if salary is below ₹12 lakh?

Under the new regime, if taxable income after the ₹75,000 standard deduction is up to ₹12 lakh and there is no other income, tax is nil, so no TDS is deducted.

Can the employer consider my other income?

Yes, if you declare it. Employers can also adjust TDS for losses under house property within prescribed limits.

What happens if my employer deducts too much?

You claim the excess as a refund when filing your return.

Is this tax advice?

No. This is general information as of late 2026. Verify slabs and rules for the current tax year and consult a tax professional for individual cases.